44 ARK.-LA. HIGHWAY IMP. DIST. V. TAYLOR. [177 . , ARKANSAS-LOUISIANA HIGHWAY IMPROVEMENT DISTRICT V. TAYLOR. _ Opinion delivered' May 28, 1928. • - - DEPOSITORIES—RIGHT OF BANKS TO PLEDGE ASSETS.—Acts 1927, p. 634, does not" authorize depository banks to pledge their assets 'other than the bonds and the notes of the State therein mentioned to secure.depositi of highWay and other improvement districts. - BANKS AND BANKING—EFFECT OF RECEIVING DEPOSIT.—The relation created betweeri a bank and a depositor by receipt of a de-, pOsit is that of debtor and creditor. 3• DEPOSITORIES—POWER OF BANKS TO PLEDGE ASSETS.—Acts 1927, p. 634, authorizing banks to deposit certain bonds therein mentioned • - in lieu of giving surety bonds to secure deposits of improvement „districts, should be strictly construed for the benefit of stockholders and protection of depositors, and the power to deposit asiets by a bank should not be held to extend beyond the express authority given •in the act. 4. BANKS AND BANKING—PLEDGE TO SECURE DEPOSITS.—While a bank may pledge its bills receivable to secure loans,' it may not do so to secure deposits. Appeal from Desha Chancery , Court; E. U. Hammock, Chancellor; affirmed.
ARK.] ARK.-LA. HIGHWAy IMP. DIST. V.:TAyI 4OR. 441 .Hemingwag, Cantrell & •Loughborough, Ed .Trice and William L. Baugh . , Jr., for..appellant.. John Baxter, for appellee. MEHAPFY, J. • This-suit was brought- bY the appellee, Walter E. -Taylor , i , Bank Commissioner,- to , recover certain notes, Assets, of : the Desha Bank & Trust Company, and- pledged by the Desha . Bank and -Trust Company to the . Arkansas-Louisiana Highway :Improvement- District Commission to secure the public funds which the commission had on deposit in said bank, and alleged:that the hypothecation of such assets by- the. bank to secure the deposit of such funds was illegal and' void' as against the other creditors and depositors of said bank, 'and asked that the . notes be returned to. the . , appellee, , ,so. that collection might be made . and: the proceeds distributed-pro rata to the depositors, , The appellant„ Arkansas-Louisiana •H s i g ay Improvement . District, is a . road improvement district . L ereated by special:act of the General Assembly, and the •esha Bank & Trut Company is a corporation organized under the laws of- the,State of Arkansas for . the purpose of doing. a :banking business,. and receiving ;deposits. On . July 21,.-1927,. the . assets • of the Desha -. Bank & Trust Company were insufficient to-discharge its obligations and liabilities, .and the -Bank , commissioner took charge for the purpose of liquidation. Prior to the closing of said bank, the improvement district-had nn deposit in: said bank approximately .$5,000,..s.aid- ;funds being placed in said bank: a , s d general -deposit .and checking . account. A' . short time-prior to- the time the Bank Commissioner took charge of the Desha- Bank &. Trust Company, it delivered to the treasurer of the improvement district certain-notes; one-for $3,14-7.40, one for-$1,215.26, :and one for $3,500. -Said notes, were listed;as the assets of-the Desha Bank 84, Trust Company at the time they were delivered to the improvement district, and Jhey were-delivered to.the.district for , the purposcof securing a general deposit in the. bank. Demand _was. made by the:Bank Commissioner, . and. the -improvement .district refuSed to return said notes.
442 ARKAA: HIGEIWAY IM. DIST.- fv.- TAYLOR. [177 Appellee . also alleged that the bank . Was:insolvent at the time these • notes 'were- giVen td the improvement di g-trict to secure the deposit that 4aS t already in the'bank, andthat the insolvency was known to said district. • The 'answer, of . the inaprovernent i district 'denied 'all . Of thernaterial•allegation of the cOMPlahlt; andthe case was tried upouthe following'agreed . : Statement ! of facts.: • "It is agreed by' John Baxter, representing : the plaintiff; •, and 'Ed' •representing • the Arkansas-Louisiana Highway Improvement DistriCt; that -the 'only issue' to be' determined in •this caSe is the' tight . of a bank to secure deposits br pledging ith own'aSsets As security for said depositS • • - • ' •• • • • • "It is -agreed that; On dr about the first day of JulY, 1927, the Arkans a ' s-Louisiana Highway Coramission had on deposit in the Desha Bank & Trust Company approXi-inately That;:- prior to -June :firSt, the . Ar k n a sag- LOuisiaUa HighWay . 'Commission had :f n i ds on deposit
badis in Southeast ArkanSas, and' ail:banks were • nOtified by' the conimissiOn I that : theYs ' would- be expeeted tb with the cemrAisSibri t Surety bonds *Ter-ing Said eaelfreSpeetiVe bank prior to Jime 10,-1927,' • when -Ot 182 Of•-the . LegiSlature of . 1927' took effect. -"That 'for 'sOnie reaSeh' 'the De sha 1113 ank & Trust Conapany' failed . -*th file the * surety, bend, aS requested, and had net . filed the 'Surety' bond up to'July •1927, and Uri July 1, in lieu . of said' surety bond,- the bank.offered and • the ::'Ai l kansa'S'-Louisiatia HighWay -• -COMmission took the Mites 'deSCribed in the plaintiff's' 'Clitatolaiht for the deposit the . ConamiSsiou' had in'said bank,- said **des. being asSets--of said bank at Abe tithe they 'were hype-thecated '• • '• •'' • • ' •- "It . is"further admitted that, if said note§ had not been' pledged or -given' to* the 'comthisSidn; a draft would haVe been -draWnon said bank' for the payment of said funds. • • ' • . • • "It is• futther'adraitted that the DeshaBank & Trust Company clesedit g• deors bY order of the 'Bank Depart-thent on July . 21, 1927, and that : since that time the assets •
ARK:-LA. HIGHWAY Igp. -DIST. V. TAYLOR. 443, of ,said . bank have been in charge of Walter. E.. Taylor, as Bank Commissioner for the State of Arkansas. ."It is further agreed that the Desha Bank & Trust Company accepted deposits and Paid checks until it was closed by -the Bank Commissioner. "It is. admitted that H. Thane was•president of the Desha Bank & Trust Company, and that a' resolution was in effect in , said bank authorizing the- president, vice president or 'cashier to hypothecate and pledge notes, mortgages, and other assets as collateral 'security for " "It is further admitted that the funds deposited in said hank were the property of the Arkansas-Louisiana Highway Improvement District, the same being funds of said district." Appellant's first contention is that banks in Arkan-sas have always had a- right to pledge that portion of their assets proper tO secure depositors ; and that, second, whether they did have the right prior to the passage of act 182 of the 1927 Legislature, after the passage of that act the bank c had the power. And appellant also states that it and -the appellee are agreed in the statement of the very narrow issue •involved in this appeal. Both appellant and'appellee s'tate _that-the only issue in the case is : Did the , Desha*Bank & Trust Company, on July 1, 1927, have the power-to pledge that portion of -its assets proper to secure the public funds .which the -Ark-ansas-Louisiana Highway Improvement District had on deposit at said bank? _ - Act 182 of the 1927 -Legislature Provides that commissioners, trea g urers and - other officers of all road, drainage, levee; . bridge, street, sewer, paving and all other improvement districts of this State, having in their charge -the moneys and funds . of such districts, shall,' before depositing same in any bank, trust company, savings association or, with any rnother person or company, require of such depository:a good .and sufficient bond, signed by, some surety,company authorized to do business in the -State of Arkansas, conditioned for the apt and full
444 ARK.-LA. HIGHWAY IMP. DIST. V. TAY1,0R. [177 and complete payment ot all funds so deposited, together with the interest thereon. It is further provided, however, - that the said depository may, in lieu of said bond above Mentioned, deposit United States bonds, or notes of the State of Arkansas, the bonds of any legally organized school, levee, drainage, or other improvement district of the State of Arkansas, which bonds and all proceedings Concerning • the issuing of same have been approved by some reputable attorney, who is recognized by the bond buyers of the United States as such, as collateral security, and such bonds shall be •deposited . in eserow with some other bank than the depository of the fund's of such district, to be delivered to such district only on failure of the depository of. such funds to repay the said funds to the district or to pay same on the order of the district. ' Said act 182, as will be seen; expressly provides that the depository may, in lieu of giving the surety bonds provided for in the act, deposit United States bonds and other bonds therein . mentioned. The securities authorized ,by said . act are specifically mentioned, and the securities involved in this case are not included in the kind of bonds mentioned in 'the statute. It is earnestly urged that the power to contract for guaranteeing or securing depositors arises from the nature of the relation existing between the banks and their depositors. The relation created between the bank and 'the depositor by the ,receipt of deposits is that of debtor and creditor. And act 182 expressly authorizes improvement districts, when they deposit money with banks, to require either a surety bond or the kind of bonds mentioned in the act in lieu of the surety bond. The Legislature could have authorized banks to pledge their assets to secure deposits, but it has not done so: The Kentucky court said : . "When deposits are received, the bank becomes a - debtor to the depositor for the amount of the deposits, and, if it agrees fo pay interest, for that also. These are the only terms and conditions regulating deposits
ARK.] ARK.-LA. HIGHWAY IMP. DIST. V. TAYLOR. • 445 and . the -payment of interest, and if, in addition to this; the bank may pledge its assets to . the depoSitor, then.it may exercise another most extraordinary power, which is not conferred by article 2 and not necesSary for the conduct of its business of receiving deposits and paying interest thereon. It would be a dangerous implication to deduce 'from the words of the- statute, which should rather be cOnstrued Strictly tor the , benefit of the stoek-holders and protection for the depositors. The exerciSe of such a' power is therefore' clearly beyond the terms of 'the law or any reasonable or necessary implication which the court would 'be authorized to deduce from the language of the statute, and would tend to lessen the usefulness of the banks as great public institution's by, destroying public confidence in them': Such a practice, if indulged and' authorized, might work , great : injustice and inflict :financial loss, not Only on the depositors, but on the stockholders as well. Large depositors, if secured, might absorb the greater part of the assets of the bank and inflict loss upon unsecured depositors and financial ruin upon innocent 'stockholders under the double Ha-bility law." Commercial Bank & Trust : Co: v. Citizens'. Trust & Guaranty Co: of West Virginia, 153 Ky: 566,156 S. W. 160, 45 L. R. A. (N.'S.) 950, Ann. Cas: 1915C, 166. If a bank could pledge any portion of its' assets ta, secure deposits, it could pledge . all of its assets, because,' if the authority to pledge its assets exists at • all', it is Without limit. And a few large depositors might be able' to secure the entire assets of the bank as a pledge for: their depOsits, to the injury of every depositor' and, the stockholders. The act relied on should be strictly coil-. strued for the. 'benefit of the stockholders and protection of the depositors, and the power to deposit assets by a bank should not be held to extend beyond the express' authority given in the statute._ Learned counSel have referred to and discuSsed many authorities, but the authorities are not in harmony, .and it would serve no useful purpose to revieVir discusS the authorities relied On. We adopted the view-expressed
446 ARK.-LA. HIGHWAY IMP. DIST..V. TAYLOR. [177 by the Kentucky court in.the case above referred to, and it would therefore be useless to_ dispuss, the , authorities taking the opposite view. ,; While it is true that, when deposits are received by a bank the bank becomes the debtor to the depositor for the amount of the deposit, we think •there is a difference between this debt and a debt created by the bank in borrowing money, although in : both instances, that is, where one, deposits • money in the bank and where one makes a loan to the bank; the relation of debtor and creditor exists, and while the bank may pledge its bills receivable to secure loans, it does not follow that it may Clo so to secure deposits. " The doctrine that there is ho difference between a loan and a deposit we cannot accept in all its implications. It is true that in law the two transactions, have many characteristics in common; •but so have other business deals which, nevertheless,: are not identical in all their legal incidents. The striking.fact. remains, .a fact which this court cannot ignor, that a real difference between a deposit and a loan has always been assumed, as a matter of custom, in the banking 'business itself, and in all legislation dealing. with the subject , since statehood. "We are warranted in taking judicial notice of the fact that, in tbe banking business, it has been and still is customary_ to treat.loans and deposits as' distinct and essentially dissimilar transactions. . Without going into details, this fact is , evidenced by methods of bookkeeping and of making reports of the financial condition of the bank, both to private individuals, through the . .press, or otherwise, and to the puMic examiner. Originally, one of the main functions of a bank was to receive money deposits or valuables for. safekeeping, and this early concept of a bank's primary office has, in a large measure, been recagnized by custom in the business, and has influenced the course of legislation upon the subject. * * * It the power exist to pledge bills receivable dn. order to secure a general deposit, it. means, in all ordinary circumstances, that its repayment would be insured by the,
ARK.] ARK.-LA. HIGHWAY . IMP. Dth. V. TAYLOR. 447 other'and unsecured depositors , of the bank, for, manifestly, a sale of the pledge, in the event of insolvency, WoUldr reduce the 'assetavailable to pay general'depositors by the amount or value of the securities. The principle of subrogation would in but few, if any, cases be efficacious to avert thisresult.. It is difficult to discover any principle on which the te. ceiver 'a the bank could recover from the surety for the benefit of 'the depositors, after the obligation to pay the , public deposit has .been discharged by a sale-of the pledge.; and in case the public depositor-proceeds first against the surety on the bond, the surety would ‘ have 'the benefit of , every security' held by the principab . and it would , be subrogated to the rights . of the ' public" corporatiOn in the securities, * *' If the power exist, it is.without limit- or qualification in the . statutes; and there is . .no . requirement,- legal or administrative; 'which- removes the mantle of absolute seerecy from' the transaction.: -The bank could —as every buSirieSS Man knows has been done on occasionnaake the pledke agreement, keep the assets iii . its possession, and, execute its receipt, therefor to. the, favored depositor, all -without a . trace on , the .records -of the corporation -showing the- transaction-- whiCh '-actually tOok place." Divide Comity Ir.' kaifd, 55. N:'D. -45, 212 N, W. 23 .6, 51 AL.' R. 29.6: 'Of course the bank could pledge the assets mentioned in:act 182, the- Legislature having authorized iimprOveMent districts fo receive pledges of ;this kind from the bank, but the_power to pledge the assets Of- the bank . should not . be 'extended beyond _that expressly authorized . b . y the L •• egislature.. Having reached the conclusion that the correct view of the law is stated in the decisions to which . we . have called attention, it . would Unnecessarily prolong this opinion and serve ho usefiil - purpOe to review 'other authorities. We think the • laW 'as announced. in the two decisions .to which we have'-called Uttention is the better rule, and; adopting that rule, it : becoines unnecessary to
448 [177 discpss . tbe other•questions discussed by counsel in their brief•. • • • • The decree. of the chancery court is • therefore affirmed.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.